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Bonds ease as investors brace for auctions

Investors focus on the volume of new debt headed to market. Treasury announces record-sized auctions next week.

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By Catherine Clifford, CNNMoney.com staff writer

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Click on the chart to see other government bond prices and yields.

NEW YORK (CNNMoney.com) -- Government bond prices eased Thursday as investors focused on a fresh volume of short-term debt headed to market.

The Treasury announced Thursday that next week it will auction $40 billion in 2-year notes, along with a record $32 billion in 5-year notes and a record $22 billion worth of reintroduced 7-year notes. Treasury's records go back to 1980.

The $94 billion worth of notes comes on the heels of a record $67 billion quarterly refunding last week. This week and next, the government is selling another $96 billion worth of shorter maturity bills.

Record auctions, which the government has been using to fund various stimulus programs, typically push prices lower "but some people were estimating even higher," said Craig Ziegler, managing director of Broadpoint Securities Group. "It is still enormous," he added.

President Obama announced a $75 billion foreclosure prevention plan Wednesday and Tuesday, he signed the $787 billion American Recovery and Reinvestment Act. Those announcements will likely mean more auctions.

Also weighing on government prices Thursday was the Federal Open Market Committee's lack of commitment to a proposal to buy up Treasurys. While one member voiced interest in pursuing the plan, "all other members indicated that they thought it appropriate to continue the program of purchasing agency debt and mortgage-backed securities," according to the minutes.

Bond prices: On Thursday, the price of the 10-year note fell 27/32 to 99-3/32 and its yield rose to 2.86%. Bond prices and yields move in opposite directions.

The 30-year bond fell 2 11/32 to 96 26/32, and yielded 3.68%. The 2-year note edged down 2/32 to 99 25/32 and its yielded 0.99%.

The yield on the 3-month note held steady at 0.32%. Demand for the shorter-term note is seen as a gauge of investor confidence.

Commercial paper: The Federal Reserve said a key form of business lending contracted for the sixth week in a row. Commercial paper sold in the seven days ended Feb. 18 fell by $32.6 billion, or 2%, to a seasonally adjusted $1.521 trillion.

Commercial paper is short-term debt that big businesses use to pay for day-to-day operations. The Fed's Commercial Paper Funding Facility, started in late October at the height of the cash crunch, allows companies to sell highly rated 3-month debt to the government in exchange for ultra-low interest rates.

Companies have been depending on that federal facility less and looking for funding elsewhere.

Lending rates: The 3-month Libor rate remained unchanged Thursday at 1.25%, according to data on Bloomberg.com. The overnight Libor rate, meanwhile, dipped to 0.29% from 0.30%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.

Two credit market gauges were little changed. The "TED" spread widened to 0.95 percentage point from 0.93 percentage point. The bigger the TED spread, the less willing investors are to take risks.

The Libor-OIS spread also rose slightly to 1 percentage point from 0.99 percentage point. The narrower the spread, the more cash is available for lending.  To top of page

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